3 usral frm Ye, he mac of a loss of legeable asses s ffere eeg o he lquy ees of he holers of hose asses We wll show ha ages who ee lquy for rasaco uroses wll srooroaely hol her wealh he form of ba eoss Hece a ba falure hs hese ages, who are lquy cosrae, more severely ha he falure of a usral frm, causg a larger ro ema for labor servces, whch was suore by ha lquy, a a larger fall GDP( Smlarly, a loss bore by eb-holers affecs GDP srooroaely more ha a equally-sze loss bore by equy vesors) Bulg o Har a Zgales (03), we coser a smle geeral equlbrum ecoomy where secury mares are comlee, bu fuure labor come s o legeable There are wo grous of ages, ocors a eachers, a he lac of a smulaeous ouble cocece of was bewee he wo grous geeraes he ee for a relavely safe asse for rasaco uroses I hs coe we show ha ages wh lquy ees (ocors) wll choose o hol a srooroae amou of (Arrow) secures ha ay off he low saes of he worl We also show ha hese Arrow secures ca be maufacure by rachg vesme ayoffs orer of seory If we bul Arrow secures hs way, he ages ee of lquy wll hol srooroaely more of he mos seor raches We he coser he macroecoomc effecs of mosg a loss o ffere raches There s a bul- correlao bewee eremely egave aggregae oucomes a losses bore by he mos seor raches To elmae he effec of hs surous correlao, we coser oly losses ue o a osycrac frau a secfc rache: a Maoff-ye loss If we o, he effec we observe woul be eve larger We show ha, whe a loss falls o seor raches, he macroecoomc effec of hs loss s more severe a so s he welfare loss assocae wh Losses bore by seor rache holers erve he ages who ee lquy, our moel he ocors, of collaeral I so og, hey reuce he effecve ema of hese ages for eachg servces, ecreasg he amou of come he eachers ca mae Uable o sell her labor servces o favorable erms, eachers wll cural her ow ema for ocors 3

18 (40) 4 ( ) ( er ) ( er ), a hs s easly see o be srcly osve, sce (4) er ( er ), gve ha er Hece, we have esablshe ha he effec o welfare of a small shoc o rache s greaer f s large Bu we ow from Prooso 4 ha s ecreasg Therefore, we have esablshe ha he welfare loss from a small egave shoc o a rache wll be greaer he more seor he rache s The uo s smle Each ollar los has wo effecs: a rec effec o welfare (equal o a ollar sce ages have lear uly) lus a rec effec o welfare rouce by he reuce level of rae (whch geeraes a osve surlus), cause by a reuce level of lquy The ocors are he ages more ee of lquy Thus, a loss ha falls srooroaely o he shoulers of he ocors wll have srooroaely large welfare cosequeces As Prooso 4 shows he eole who ee lquy he mos ( our moel he ocors) ves more of her wealh seor fus I fac, he more so, he more seor hey are Thus, a loss he more seor fus wll fall srooroaely o he shoulers of he ocors a hus wll have a srooroaely large effec o he level of ecoomc acvy a a srooroaely large loss aggregae welfare I s aural o as how large W s Oe s frs hough s ha W >, e, he effec of a wealh shoc wll be mulle, gve lquy cosras However, hs oes o have o be he case I fac, s eve ossble ha W <0! The reaso s ha a osve wealh shoc ha affecs maly eachers ( close o zero) wll rve u he rce of ocors servces (see (34)) a herefore reuce he suly a crease he rce of eacher servces (see (33)) Ths ca mae he ocors so much worse off ha he sum of he ocor a he eacher ules falls 8

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